Grupo Casas Bahia S.A. (BHIA3) Earnings Call Transcript & Summary

Hello. Good morning, everyone. Welcome to our call as we talk about this important agreement that provide a structural and definite solution for reprofiling our debt structure in the company. Thank you for being with us today despite the short notice so we can explain this a bit. So to start off here, we really are very honored to present this new debt reprofiling process that's structural and it [ reprofiles ] debt structure in the company with a long duration, cost reduction and really makes it possible for our transformational plan to take place making the company more sustainable. So I want to remind you all that when I arrived in August, we prepared this transformation plan, so we can share the slides now, please. So we can skip to the next one. We began in August -- please, next slide. On the 10th of August, we started preparing this transformational plan that included some operational levers and capital structure levers. So we've been providing accountability on this at every quarter. And I understand everyone's anxiety to look at the first quarter release that will take place on the 8th of May. So you can see the clean scenario of these nonrecurring expenses that took place, and that impacted the results in the third and fourth quarters. But this was a reduction that was very massive in personnel, [ SG&A ], and you're going to see the results in the first quarter. We have a reduction in stocks that also provide some relief, allowing us to have significant liquidity, BRL 3.5 billion at the end of the year. We closed 55 stores and the recovery plan was able to recover the other stores. And adjusting the DCs, we were able to sublet 4 DCs with some idle capacity, and now we also have 10 more ones that we'll be able to return or sublet. And also the major penetration of services evolving a lot contributing to the gross margins and also the growth of our buy now, pay later structure, the [ KGI ] that provides even more results throughout 2024 and the Retail Media that will also help us a lot. But today, we're talking about the capital structure. And ever since the beginning, we had a clear objective to have this new profile for our debt and liability management, increased duration and reduce the cost of capital, and this has been going on as a process ever since I arrived, and we're trying to find a definite solution. Moving to the next [indiscernible] everybody join us on the same side of the table. So really having a consistent plan and execution that was consistent, which justifies and gives us the basis to think about something that's really long term. And we're able to advance a lot with this negotiation instead of just having occasional agreements that solve short-term problems and then we'd have to move on to the discussion with the new agreement, and that removes the focus from the management, creating this perception that the market has a wrong perception. And they're not aware of the size of the support we have from the banks, and we were able to sign an agreement with creditors that addresses the entire company debt, so BRL 4.1 billion. And these are the 4 series of debentures plus CCB that we were able to issue together with the banks, and we were able to increase average term from 22 to 72 months and we're able to reduce the cost [ 5 ] percentage points. So I wanted to mention that this advance in the operational levers and the transformation plan has been rigorously on time, on track with these levers and these initiatives to increase the operational capacity, which allowed us to have a conversation on reprofiling and liability management from a structural perspective with the support from our main creditors. This is very material and an improvement in our cash flow would be BRL 4.3 billion in the next 3 -- in the next 4 years. So in 2024, we bring in a gain of over BRL 1.5 billion. And we have a lack of the principal amount and interest rates that's higher than 2 years, which also helps a lot with the reduction of costs, leading to savings and also the spread in the CDI. So it's important to mention also that it's a restrictive period. And by what we noticed, this is very unique. We start off with pre-approval process. And we have the CCBs and the debentures that do not, in any way, impact the company's operations. So I think you can see the [ limit ] of normal life without an impact on customers. And actually the relief of the cash flow will provide the company with even more negotiation and -- negotiations with suppliers and really take advantage of the business opportunities that appear. We have the seasonality of the second semester with anticipation of the purchases from Black Friday [indiscernible] to consider the drought in Manaus and maybe anticipate a bit of air conditioning, et cetera. So this really leads to tranquility to get us on the operational plan in the company and the transformation of the company. And obviously, last but not least, the fifth point, which is preserving value to creditors. So we didn't -- so we actually have been discussing market level interest with actual guarantees and a unanimous condition to all of our creditors, and we are very fair also with the company and creditors overall. So next slide, please. Here, we're getting into maybe what the most important image in the presentation. So the graph maybe is worth more than 1,000 words, but the truth -- these are transformational. So we had BRL 1.5 billion to pay in 2024, over BRL 800 million to pay in 2025, BRL 900 million in 2026 and another BRL 1.5 billion in '27. So the company would have this wall at every year and each lever releasing cash would be consuming this result by the amortization we have in our debt profiling. And we were able to solve this so that the company could really have the necessary capacity to execute this transformational plan and really generate value with higher EBITDA, recovering growth and recovering its market positioning, taking advantage of this leadership in the home appliances, electronics, cell phones and television market. So this is the new reprofiling process on the right side, and you can see how that improves things and transforms things. So all of these limitations were set to '29 and 2030. So it makes it a lot easier for us to have the necessary time to work and have management's focus on the company's operation. Whether we like it or not these debts at every quarter that are really short term required a lot of work from management and treasury as well, searching for sources, working with creditors and banks at all times. And now we're going to be able to work very focused on the operation cost reduction, a lot of cost reductions for indirect purchases, optimization of the mix, use advanced analytics and the pricing. A lot of things we can evolve in with the operational levers in the company and delivering a gradual margin improvement quarter-over-quarter. So we're super happy with these results and really excited as well with what we're going to be delivering in the company's operation. Moving on to the next slide, please. Having said that, we reinforce how we were in the overall creditor base. So the total debt is about BRL 4 billion. And here is just the debt of the company that doesn't include the operational credit lines like CDCI with the funding of our buy now, pay later and the drawn risk. And so we're talking for [indiscernible] processes. So we have 54.5% in the hands of [ institutions ], some assets as well. But with the partnering banks, we can already have the necessary quorum to start with this approved. So this leads to a total of BRL 4.1 billion, and we are very comfortable from -- with the opinion of our lawyers, and we have a very frictionless operation without an impact on the company's operations. We can move on, please. Now as we head to the next slide, how will this end up? Well, we have those 5 instruments the company had before with maturities from the '24, '27, and we transform all of them into a single debenture with 2 series. So Series 1, all of the creditors are going to receive 37% of their credit on Series 1, which is BRL 1.5 billion, with a grace period of 24 months and the interest part. And the payments will take place according to the amortization item. So November '26, 10%; November '26, 10%; November '28, another 20%; and 60% in November '29. So the Series 1, 37% of the credits of all of the creditors are going to be left in the Series 1. Series 2, 63% of the credits are here. So BRL 2.6 billion, which will be Series 2, where we have this rate of CDI plus 1% and the bullet November [ 2030 ] which is principal plus interest. So it's very extensive series. And we have 2 classifications, partners and non-partners. So what's the criteria to be a partner? Well, you have 2 options. You have 2 possibilities to be a partner, which will allow you to have the equity conversions that we're going to discuss in a bit. The first criteria is creditors that keep the current conditions in lines that are not subject to income tax -- to RE, sorry. So being the [indiscernible], but that allow the creditors to be a partner, so the banks already start off as partners here or creditors that allow for new resources in conditions to be defined. So this term of the new cash and also the CDI rates to be a partner creditor. So this amount will be distributed among the series. And if you're a partner creditor, you have the right to have an option to convert into equity in this window between 18 and 36 months. So you already have time for the transformation plan to be complete. We'll expect this to be finished by the end of '24. And so then we'll be restarting this growth cycle in the company, and so we'll be able to capture this value. And between 18 and 36 months, we'll have the quarterly windows to convert this into equity with 80% of the -- it's about [indiscernible] on the average price over the last 20 days. So to be -- 2 of the main reasons are to capture the upside in the transformational plan. So it's a debenture series with a cost of CDI that's very fair to the company, CDI plus 1%, and the upside in this conversion that can be captured as well through the equity conversions. So if you go to Series 3, which is a non-partner, that's just a bullet at the end of November 2030. So moving on to the next slide, we are talking about how this process works. Once again, it's very simple and fluid process. Negotiations are very complex and intense. So as we reach this process, looking at the adhesion term with the debenture structure built and agreed upon among parties, we'll start off with RE request, then we have a legal assessment in this process and verification of all the documentations. And these processes are -- we have a lot of comfort from our lawyers, and we have no risks of non-approval that can't be explained or solved very quickly. So if everything works well, in 30 days, we'll have these -- approval of this plan and then all of the current debentures, together with CCBs, are converted to this new instrument. And this new debenture is agreed upon among parties. So it's a very fluid and simple process that helps us keep our commitments to suppliers, and we had very positive feedback as well from the credit insurance companies and suppliers. Everyone is very satisfied and excited with the evolution of this transformation plan and now it's an important step. That provides us with the necessary oxygen to continue to focus on operations and evolve. We have in this process some fragmented financial creditor use. So the focus of using this tool is that it was nonoperational to try to bring all the financial creditors with smaller fragmented creditors. And so we would have individual creditors as well, as well as companies, and so it would be very fragmented, and we would not be able to work on this operationally. So what we did here was a means to really attach all of these creditors as well and have a single debt for the company, which ensures the operational continuity of the company. On the bottom part, you can just reinforce what we've already discussed in the first slide. It does not affect labor rights or employee rates. It doesn't require monitoring from -- like a Chapter 11 process, it's not in any way related. And we continue to have access to credit. Banks had very positive feedback. And there's a lot of important upsides for the company and an overall positive perception of this, of course. And it depends on our capacity to execute the transformation plan in the company, which is our commitment and objective to deliver excellent results in the first quarter and improve this quarter-over-quarter, completing transformation of this major company until the end of '24. We can move on to the next slide, please. And on this last slide here, we report the benefits of this new profile for our debt and liability management. So we look at the major benefits. The first one is an improvement of BRL 4.3 billion in our cash flow for the next 4 years. Once again, that's very significant for the company. The extension of the duration that goes from 22 to 72 months, another cost baseline with a reduction of 1.5 percentage points in the cost of the debt, and this new capital structure that improves their capital perspective with new creditors assessing this. And this also brings a lot of flexibility in its relationship with suppliers, insurers, and, of course, you have more cash availability in the company. So in this new cash flow, we generate a lot more safety against possible volatility in the market. From a macro perspective, we can't control this. But we see major global conflicts that could impact the Brazilian economy and the U.S. And so we also performed many simulations on our model. And here, we gain a lot of strength to absorb possible market variations and volatilities. We've been preparing for this scenario, and we were very precise in this, of course, with some categories surprising us. But overall, the macroeconomic is very -- environment is very limited when it comes to this economic scenario. But here, we have a lot more oxygen to absorb these variations and the company will be a lot more resilient. And of course, you can understand what is really our work, which is having an efficient company and its profitable, and that is a specialist there focused on core. So we're really satisfied and happy with this important step we're taking that's in line with our transformation plan. It was already our desire to anticipate this a bit and having this new complete reprofiling of our debt position and now with less than 1 year from the transformation plan. So I want to thank you all for your support. And I think this is very important with the work of all of our teams of over 35,000 employees that have been working intensely delivering results, achieving their goals and improving the efficiency of the operations. I want to thank you all that. Of course, you send these questions. We have Gabriel receiving all of the questions by e-mail as well. And we are going to be answering these questions live. And the ones that arrive later on will be answered by the IR team. So Gabriel, do you have any questions to answer already?

Thanks, Renato. Thank you, Elcio. Thank you, everyone. Yes, we do have questions. The first question, Renato, is, which is the expected timing for the company to certify this and how much time we have understood for this process to be certified?

Okay. Thank you. Here, as we mentioned in that slide on the timeline, the expectation is 7 days for the verification, plus 30 days for the official validation. But we expect it to really be a very previously approved process by the creditors. A simple process that should take about 37 days, 40 days max, to have this official definition of all this. We could have some delays, but this is what we're expecting.

Okay. Thank you, Renato. Our next question is how the conversion system works to stock and what's the potential dilution? And what would be the right of preference for shareholders?

All right. Do you want to get into details, Elcio? I think it's great if you can also give your own perspective.

Thank you, Renato. Thank you, Gabriel. Well, I just wanted to maybe go back to the Slide 6 that talks about the structure bit. And then we'll talk about this process. So just to remind you all, this is a transformational process when we look at the cash flows, because it eliminates the grace period for the interest and principal amounts, and it's fundamental to preserve this cash position. We're talking about BRL 3.4 billion in 4 years. It's very substantial, with BRL 1.5 billion only in 2024, the remaining 9 months we have in the year. So it's very transformational. And the perimeter -- the exclusive perimeter of BRL 4.1 billion are the debts that the company has that don't involve this very defined, specific perimeter, and it's converted into a new debenture. As you can see on the screen, we have Series 1, Series 2 and Series 3. And I want to remind you that Series 2 and 3 have a potential of [ 103% ]. And the breakdown between Series 2 and 3 will depend on the conditions of the percentage that will be allocated here in Series 2. So whoever's going to Series 2, the creditors have the current conditions. Credit lines that are out of the perimeter today of these BRL 4.1 billion, or to have a treatment that is completely fair, the investors add new cash to the defined conditions. So these are the ones that will have the possibility to have this option for this relation. So you have the convertible real estate values. These new debentures of second series will be subject to the right of priority or preference to the current shareholders. They can choose how to write them off between the launch and the [indiscernible] process. But the plan expects that if they do exercise the spread of preference or the resources from this payment will be used by the company and paid by the company to the creditors and sponsors that will have the capacity to reduce the new debentures in the second series. So the terms of this plan, the right of preference can be considered proportionally with the participation or share of the shareholders that cannot be granted to third parties.

Thank you, Elcio, for that explanation. Now our next question is from -- I'm going to read it. It's a little long, but it is really in line with the additional oxygen that the plan brings to the company leaves some space for the turnaround initiatives, especially in the operational levers. So I think then, Renato, if you could maybe explain this one, what are the main KPIs that we should monitor to understand the evolution of these initiatives? And what we should expect as the evolution of these results quarter-over-quarter?

Okay. Thank you. Well, a great question, but now as we look at the KPIs, we consider a GMV and this is a specialist player. So a transformation plan. One of the decisions was looking at those categories that are not core. We had 23 categories that we migrated entirely to 3P. And then we removed the incentive for heavy-duty investments in marketing, free freight costs, et cetera. And so there's an impact in the GMV, and that's especially online. That affects a bit of the logic here. Now we're going to see the GMV for online a little bit smaller. That improves the margins. And then we move on to another indicator, which is the gross margin. So when you look at the GMV, the most important point is the market share and the core categories that you can monitor through GFK or profitable fee, and our focus is to protect our market share and the company's leadership in these categories and even gain some market share points at the core levels. But we want to leave this impact -- the activities that have this impact. So first of all, we have the better selection of the SKUs we're purchasing and a more calculated process to analyze the results we desire to deliver and also the penetration of these services, which is a strategic KPI. We're really evolving in the penetration services offline and we saw improvements. Of course, you're going to see these improvements in the first quarter, but it's going to get better and better every quarter. And online, which is a little more difficult, we started to have an improvement. It was incremental, but it's still very small. And we do have some plans with projects and some investments being made for UX to improve the conversion of sales services online. And another point that's very important [indiscernible] which is very important, it's very profitable process at the core and there's a potential for growth. Here, we have 2 factors. With the current line as it is today, in this current facility, we completely unleash a bit of evolving and grow a bit throughout '24. So you're going to notice some growth in this process throughout '24 [indiscernible] commitment with the creditors, and have the FIDC [indiscernible] credit facility. So we're migrating from CDCI to the FIDC, and that's going to really help [indiscernible] so we capture the full value with a bigger [indiscernible] resource for our customer. [indiscernible] which allows to have a better margin for [indiscernible]. And we showed this in the first quarter. [indiscernible] last line and then we can really optimize the profitability of each product, which when we add up to this will impact the profitability of the company. And we'll have a lot of upsides throughout '24 of this model. So I think they're the main indicators of [indiscernible] so in the short term and then we'll have the growth of the core and other things will be monitoring we can start, disclosing the media as well. [indiscernible] We're starting off as the lead this year, but by '25, it's going to become very significant for the company and we will disclose this effort from next year onwards about the actual retail media business. [indiscernible] We have an important P&L. It's a very high margin and we already have hundreds of contracts signed that will help provide even more profitability, monetizing all of our equity system online and offline. Thank you, Gabriel. I hope I answered the question.

That was great, Renato. Now we have another question here just arrived at the IR e-mail which is the breakdown from the creditors already approved the plan for this perimeter. So if you can remind us about that. Throughout the presentation, you already mentioned that. And also just to reinforce the fact that we will see any impact just for the perimeters.

Great. So, yes, 54.5% already commented [indiscernible] 54.5%. And so that just considering the financial debt, we're in the sixth, seventh and eighth [indiscernible] of this debentures. And so we do not have any other kind of scope. The rest is pretty much normal life as we had seen in the company with greater flexibility before.

Okay. Thank you. So just to reinforce, this is Renato, these are the financial debts that we consider, those BRL 4.1 billion, these are these. So sixth, seventh, eighth and ninth, plus the CCBs.

Okay, perfect. Great. Thank you, Renato. Thank you, Elcio. Our last question here today is what's the impact or if there's a modification in the company strategy from now on?

Great question. There's no impact on the strategy. This strategy continues to be a central player focused on value creation, profitability and commitment to this capital allocation discipline, just placing money where we're actually going to generate value. When we look at our plan, we continue to focus on the transformation operation of the company and also work walking hand in hand and evolving a lot with the transformation plan. So when we look at the long term, we should finish the transmission plan till the end of '24 [indiscernible]. So besides this, we'll have the possibility to open up new stores. Next week, we'll be working with a new shopping [indiscernible] with the store in store model. So if you know our mega store at Marginal, there's the store in store concept [indiscernible] retail media, monetizing the space with industry partners. Now we can replicate this model to really apply this to our [indiscernible] shopping mall [indiscernible] investing in this space. [indiscernible] margins for us and for partnering investors. So we hope to replicate this to more stores gradually with an incremental approach. And at the end of the day, it will be very important reinforcing our positioning as a specialist player with the best purchase journey and experience online and offline for any kind of real estate -- sorry, for any kind of home appliances, electronics and other items like televisions, et cetera. So the [indiscernible] will have new product opportunities for our customers and also financial solutions to our suppliers, especially small and medium suppliers, where we see a lot of value to be captured. So it doesn't modify things. But maybe with a little more oxygen, we'll be able to actually anticipate some of these levers and improve results a bit. But the macro scenario is what it is, very challenging. We have to be very cautious about our commitments taken on and we'll keep our base plan, of course, but with this necessary oxygen and time, will be most probable having a cycle of improvement in the macro scenario, which will boost up our plan and help us deliver a great ROIC and a great spread on our cost of capital as well, which is our commitment. So we're very excited. It doesn't change the company's strategy and we continue to be really happy and focused on the company's operational transformation.

Thank you, Renato. We have no other questions, so we just wanted to also clarify that all of the questions that come in throughout the day will be answered by e-mail or any other channel we have provided to you for contact information. So I want to pass this on to your final remarks, Renato.

[indiscernible] Once again, we still have a lot of objectives here on our operational plan. This is clear to everyone. We're not even halfway into this operational transformation process and we disclosed 35% this quarter, but this evolution is gradual, month after month, quarter over quarter. But we're really confident. And I think this agreement with reprofiling for debt is an important step and it allows us to have even more focus and accelerated [indiscernible] operational plan for the company. So as we have found some more [indiscernible] transformational plan scenario, which is still challenging, but we're going to be preparing the company for sustainable cycle of growth and by end the year, we will have a company that's already keeping [indiscernible] a higher margin that's also very significant, a good cash flow, you have seen this cash flow, very positive [indiscernible] up head. And we start paying interest again and principal that we can really have a company that's sustainable. We're optimistic with the future and we are aware of the challenges we have, and aware of the challenges we have in the retail market, in a market that is so challenging as it is, so no one here has the belief that it's easy. We know the challenges. We are aware of the challenges and we are aware of our commitment to search for more cost reduction and operational efficiency to have a company with major [indiscernible] that gain scale and has a base business [indiscernible] commitment and our purpose. And once again thank all of our stakeholders, our employees, over 35,000 people who work hard every day in our stores and our DCs and our offices and also suppliers that have been great partners, insurance companies, the banks, the creditors that allowed us to reach this point and take those important step and now join in this new phase in our delivery quarter over quarter, with the operational evolution of the company. And that's where we're going to start changing the market perception and start reaping some benefits of the transformation being made in the company. Thank you all so much. Have a great day and an excellent week. And we'll be available to clarify any other questions on our channels for communication with investors, clarifying any of the future questions you may have. Thank you all. Have a great day.